EquityGlobal Macro ISSUE 77 | April 11, 2019 | 4:49 PM EDT ResearchResearch TOPof MIND BUYBACK REALITIES The surge in US corporate buybacks to all-time highs in 2018 has generated public debate about the effects of buybacks on workers, companies, and the economy. We speak with William Lazonick, prof. at the University of Massachusetts, about the concerns driving this debate, at the core of which is the notion that buybacks come at the expense of investment. But GS portfolio strategists see little evidence of this. Aswath Damodaran, prof. at the NYU Stern School of Business, argues that’s because buybacks redirect—rather than reduce—investment, and trapping cash in firms that don’t have a good use for it instead would harm their competitiveness. More broadly, Steven Davis, prof. at The Chicago Booth School of Business, explains that such an inefficient allocation of resources would shrink the size of the economic “pie” and likely reinforce the unequal distribution of it. As for market impacts, we assess the size of the corporate bid (meaningful) and if it looks to be fading (no). And we ask what would happen if it did (bad news for equity investors).

Where did the $800 billion worth of cash used for WHAT’S INSIDE buybacks in the US last year go? That money didn’t just INTERVIEWS WITH: “disappear; shareholders typically use their returns to Aswath Damodaran, Professor, NYU Stern School of Business invest elsewhere in the market. So it’s not that companies are investing less; it’s that different Steven Davis, Professor, The University of Chicago Booth School of companies are investing. Business

- Aswath Damodaran William Lazonick, Professor, University of Massachusetts The argument that not meeting “hurdle rates” justifies DEBUNKING BUYBACK MYTHS engaging in buybacks rather than re-investing is David Kostin and Cole Hunter, GS US Equity Strategy Research

nonsensical and rarely made by successful CEOs who understand the need, in the face of uncertainty, to invest WHAT IF THERE WERE NO BUYBACKS?

in future products to remain in business. Arjun Menon, GS US Equity Strategy Research

- William Lazonick Q&A ON STOCK BUYBACK MECHANICS Neil Kearns, Head of Goldman Sachs’ Corporate Trading Desk Trapping resources in larger and older businesses not “ only inhibits the overall size of the pie... but also tends to EXPLAINING THE TRANSATLANTIC BUYBACK GAP reinforce the unequal distribution of the pie. Sharon Bell and Hiromi Suzuki, GS Europe and Japan Equity Strategy - Steven Davis Research ...AND MORE

Allison Nathan | [email protected] David Groman | [email protected]

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.

The Goldman Sachs Group, Inc. Top of Mind Issue 77 MacroEl news and views We provide a brief snapshot on the most important economies for the global markets

US Japan

Latest GS proprietary datapoints/major changes in views Latest GS proprietary datapoints/major changes in views • No major changes in views. • No major changes in views. Datapoints/trends we’re focused on Datapoints/trends we’re focused on • Signs that US growth is picking up, especially given stabilization • A less-rosy picture for Q1 GDP, given a likely decline in Q1 abroad and an improving impulse from financial conditions. exports, still-sluggish retail sales, and a weak rebound in IP. • The sharp rebound in non-farm payroll growth in March (+196k), • A fall in model-implied recession risk given slightly improved which we think should quell fears of stalling jobs growth. business conditions, though caution remains warranted. • Softer-than-expected core PCE inflation in January (1.79%) on a • Rising market expectations of a BOJ rate cut; we expect the decline in financial services prices and longer-term drags from bank to remain on hold barring a sharp yen appreciation. shelter and healthcare; we still expect 2%+ inflation in 2020. • A meaningful drop in manufacturing DI in March.

Picking up Less risky (for now) US Current Activity Indicator (CAI) by sector, % change (annual) GS model-implied recession probability for Japan, %

5.5 100 Manufacturing Consumer Labor 5.0 Housing Other 90 Recession Probability 4.5 80 4.0 Three-Month Average 70 3.5 Consumption 3.0 60 tax rate hike 2.5 50 2.0 40 1.5 1.0 30 0.5 20 0.0 10 Mar Jun Sep Dec Mar Jun Sep Dec Mar 2017 2017 2017 2017 2018 2018 2018 2018 2019 0 *First principal component of 37 key weekly and monthly US economic indicators. 2014 2015 2016 2017 2018 2019 Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research. Europe Emerging Markets (EM) Latest GS proprietary datapoints/major changes in views Latest GS proprietary datapoints/major changes in views • No major changes in views. • We now expect the first rate cut in Turkey in 4Q2019 (vs. Q2 Datapoints/trends we’re focused on previously) on recent FX volatility; we also see downside risks to our below-consensus 2019 GDP growth forecast of -2.5%. • Continued downside surprises in German manufacturing data despite signs of strength elsewhere in the Euro area. Datapoints/trends we’re focused on • An ongoing fiscal boost, which should lift Euro area-wide • Accelerating EM growth; our EM CAI rose to 3.4% in March growth by 0.4pp in 2019. from 3.1% in February (on a 3mma, equal-weighted basis). • Weaker-than-expected HICP core inflation, as market • Signs of a consolidated Chinese growth recovery in coming measures of inflation expectations fall close to historical lows. trade/money and credit data, following on stronger-than- White House communication on tariffs on European cars. expected March PMIs that likely received a seasonal boost.

Different directions China (and EM): giving the globe a lift Euro area manufacturing vs. services PMI (50+ = expansion), index Contributions to change in global CAI (Dec. 2018-Mar. 2019), bp 65 40 Euro Area Manufacturing PMI 30 60 Euro Area Services PMI 20 10

55 0 -10 -20 50 -30 -40 45 China EMs ex China US Euro Area Rest of DM 19% 34% 19% 15% 12% 40 of world of world of world of world of world 2012 2013 2014 2015 2016 2017 2018 2019 Note: regional contributions are weighted by the respective PPP world share. Source: Goldman Sachs Global Investment Research. Source: Haver Analytics, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 2 Top of Mind Issue 77 BuybackEl realities

S&P 500 share repurchases surged 50% to an all-time high of companies to make bad investments, further damaging their over $800 billion in 2018, generating public debate about the competitiveness and creating more “walking dead companies” use of corporate cash in Washington, DC and beyond. How US similar to what we see in Europe. This, he fears, could backfire companies use cash, the motivations of executives buying back on workers, as firms are ultimately forced to pay less, hire less, stock, and the effects of these buybacks on workers, or reduce their workforce altogether. In the end, he believes companies, the economy, and the market are Top of Mind. banning buybacks would ironically most likely benefit corporate executives (who would now have the luxury of sitting on cash) To start, William Lazonick, professor at University of and bankers (who will reap the gains if executives instead Massachusetts, lays out several concerns about buybacks pursue acquisitions), while hurting workers. (Note: see pgs. 16- driving the public debate. At their core is the notion that 17 for our take on why companies outside of the US pursue returning cash to shareholders comes at the expense of less buybacks, and whether that’s set to change.) investment. This, in turn, harms innovation as well as American workers, who, Lazonick argues, should be getting a much Steven Davis, professor at The University of Chicago Booth larger share of company profits than shareholders. He also School of Business, then dives into the potential implications of believes that paying executives with stock distorts their banning buybacks for business formation, job creation and the incentives, motivating them to boost share prices, no matter broader economy. He explains that such a ban will likely lead to the cost to employees, their companies’ future growth, or the an inefficient allocation of resources, which will ultimately economy writ large—especially as the US increasingly loses shrink the overall size of the economic “pie”. And since he out to more innovative competitors. What’s the fix, in his view? finds that younger and smaller businesses are an important Ban buybacks, stop paying executives with stock, and give source of jobs in the economy—particularly for workers at the employees their due—all of which will only be truly meaningful lower end of the earnings distribution—he’s concerned that in a world in which the “maximizing shareholder value” trapping cash in older, larger companies will reinforce an ideology no longer prevails. unequal distribution of the pie, aka: income inequality. In his view, the best bet to increase the size of the pie and even out But, when looking at the numbers, GS US portfolio strategists its distribution is to foster a favorable environment for starting David Kostin and Cole Hunter find many of these arguments and growing businesses. That would entail simplifying the tax don’t hold up in reality. In particular, they emphasize that even code, reducing labor market restrictions and regulations, and as companies return a large amount of cash to shareholders, revamping local and federal regulations in other areas that there is sizable reinvestment; in fact, growth investment at create a complex and costly business environment today. S&P 500 companies has accounted for a larger share of cash spending than shareholder return every year since at least But beyond these firm-level, economic and social implications 1990, with the largest share repurchasers far outpacing market of buybacks—and the prospect of banning them—what about averages in growth of R&D and capex spending. They also find the market impacts? Neil Kearns, head of the GS US corporate that executives who stand to gain the most from buybacks— trading desk, assesses the size of the corporate bid those whose compensation depends directly on EPS—did not (meaningful), what drives fluctuations in it (primarily corporate allocate a greater proportion of total cash spending to buybacks earnings, but also market swings), and if it looks to be fading in 2018 than executives whose pay was not linked to EPS. (no). GS US equity strategist Arjun Menon then asks the most important question for equity investors eyeing recent Aswath Damadoran, professor at New York University Stern developments: what would the equity market look like without School of Business, agrees that buybacks aren’t coming at the this corporate bid? His (concerning) answer: lower EPS growth, expense of investment. Rather, he argues that large, mature multiples, and index levels, and higher market volatility. companies returning cash to shareholders allows that cash to be put to more productive uses; so it’s not that companies are Allison Nathan, Editor investing less, it’s that different companies—with better growth opportunities—are investing instead. Email: [email protected] Tel: 212-357-7504 Goldman Sachs and Co. LLC As for workers, Damodaran worries that constraining companies’ ability to return cash to shareholders would lead US

1,600 Investment for growth (R&D + capex + cash M&A) 1,400 S&P 500 cash spending (last 12 months) Return to shareholders (dividends + buybacks) 1,200 1,000 800 600 400 200 0 1990 1995 2000 2005 2010 2015 Source: Compustat, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 3 Top of Mind Issue 77 DebunkingEl buyback myths

plunged by 12% in 2012, rose by 13% annually during the next David Kostin and Cole Hunter address myths three years, dropped by 7% in 2016, and fell by 2% in 2017, coloring the debate on stock buybacks today before rebounding last year. In contrast, dividend growth has been far more stable, rising steadily by an average of 7% S&P 500 share repurchases rocketed 50% to an all-time high of annually during the past decade. Looking forward, we expect $811 billion during 2018. As a result, the impact of corporate S&P 500 aggregate buyback spending to rise by 16% to $940 share repurchases—as well as the motivations of managers billion in 2019 and dividends to rise by 11% to $525 billion. who buy back stock—have become popular topics of public Myth #3: Companies used extra cash from 2017 tax reform debate. However, a number of misperceptions surrounding solely for stock buybacks. corporate cash spending priorities and the economics of share repurchases have colored the recent dialogue. We debunk Reality: Buybacks have picked up since the passage of tax these myths. reform, but so too has growth investment. For context, one consequence of the 2017 Tax Cuts and Jobs Act was that Myth #1: Buybacks dominate corporate spending at the earnings permanently reinvested overseas were subject to tax expense of growth investment. regardless of whether the profits were actually repatriated. Reality: Growth investment (capex, R&D, and cash M&A) Accordingly, after paying the tax, firms had an incentive to has accounted for a larger share of cash spending than return cash to the US rather than leave earnings trapped shareholder return (buybacks and dividends) every year abroad. It’s true that the substantial growth in share since at least 1990. Capital expenditures and R&D have also repurchases during 2018 was highly concentrated among firms been remarkably stable. Indeed, for the past 30 years, with the highest earnings trapped overseas; 7 of the 10 stocks corporate cash spending on capex and research and accounting for the largest share of the year-over-year increase development initiatives (R&D) has consistently equaled roughly in S&P 500 share repurchases had significant earnings trapped 8% of sales. During 2018, S&P 500 firms increased capex and overseas before the deemed repatriation. R&D spending by 13% to $1.0 trillion, equal to 9% of annual But growth investment has also accelerated sharply since the th sales (a 98 percentile reading since 1990). In 2019, we passage of tax reform. A company must invest at the same forecast capex and R&D spending will rise by 10% to $1.2 rate as depreciation in order to maintain a consistent asset trillion and account for 38% of the $3.0 trillion of aggregate base, while capex in excess of depreciation represents cash spent by S&P 500 companies, vs. 13% spent on cash investment for incremental growth. The capex-to-depreciation M&A, and 49% returned to shareholders. ratio (sometimes referred to as the "reinvestment ratio") had We find little evidence that share repurchases are crowding out been persistently declining since the summer of 2014 and growth investment among the index’s largest repurchasers. reached the lowest level this cycle in the summer of 2017. Just 10 S&P 500 stocks account for nearly two-thirds of the However, following tax reform, the S&P 500 reinvestment ratio $271 billion year/year increase in share repurchases in 2018. rebounded sharply to 130% in 2018. These 10 stocks increased spending on capex and R&D by Myth #4: Management teams only repurchase stock in an 26% during 2018—nearly 2x the pace of growth for the attempt to inflate EPS and meet incentive compensation aggregate index. Capex and R&D as a share of sales equaled targets. 13% for this group of stocks last year, a full 4 pp higher than the index as a whole (see p. 15 for more). Reality: Executives whose compensation depends on EPS did not allocate a greater proportion of total cash spending Myth #2: Cash payouts to shareholders are exceptionally to buybacks in 2018 than companies where management high today. pay was not linked to EPS. The 247 companies in the S&P Reality: S&P 500 firms have been returning cash to 500 with incentive compensation programs linked to earnings shareholders for at least 140 years and current payouts are per share—a metric that would benefit from accretive share not extreme by historical standards. The S&P 500 cash buybacks—actually spent a smaller share (28%) of their total return payout ratio (dividends + net buybacks / net income) has cash outlays on repurchasing stock compared with the 253 averaged 73% of earnings since 1880. Between 1880 and firms without a performance metric linked to EPS (31%). 1980, most distributions were in the form of dividends. Moreover, the 49% of S&P 500 firms with EPS-linked However, since the early 1980s companies returned cash to compensation accounted for just 45% of total 2018 buybacks shareholders via both dividends and share repurchases. In ($362 billion). We also found no relationship between how 2018, the combined payout ratio equaled 88% of earnings, management teams with compensation incentives tied to total ranking in the 76th historical percentile since 1880. shareholder return (TSR) spent cash relative to those firms with no shareholder return incentive. One reason that companies have increased buybacks relative to dividends is that buybacks offer management teams greater David Kostin, Chief US Equity Strategist flexibility to increase and decrease the amount of cash returned Email: [email protected] Goldman Sachs and Co. LLC to shareholders. Broadly speaking, buyback growth typically Tel: 212-902-6781 follows the trajectory of earnings growth. Therefore, large Cole Hunter, US Equity Strategist swings in profits mean that buyback growth also varies widely. For example, during the current economic expansion, buybacks Email: [email protected] Goldman Sachs and Co. LLC Tel: 212-357-9860

Goldman Sachs Global Investment Research 4 Top of Mind Issue 77 MythEl busting buybacks

Growth investment has increased sharply in recent years R&D/capex are close to their highest levels ever as a % of sales Real S&P 500 growth investment, 2018 $ bn* S&P 500 investment, % of sales

700 14% 2018A: $549 bn (+17%) 600 12%

500 10%

400 Avg: 8% 8% R&D 300 6% 200 4% 100 Capex 2% 0 0% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1990 1995 2000 2005 2010 2015 2020 *Growth investment is R&D + capex - depreciation; deflated using CPI inflation. Source: Compustat, Goldman Sachs Global Investment Research. Source: Compustat, Goldman Sachs Global Investment Research.

Buybacks picked up after tax reform in 2017… …but so too has the pace of growth investment S&P 500 share repurchases, $bn S&P 500 capex/depreciation ratio 1000 1.8 900 2019E: $940 bn (+16%) 1.7 Investing 800 more for 2018A: 1.6 growth 700 $811 bn (+50%) 1.5 600 500 1.4 400 1.3 300 1.2 200 1.1 100 December 2017 1.0 Maintenance 0 0.9 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

2019E 1990 1995 2000 2005 2010 2015 2020

Source: Compustat, Goldman Sachs Global Investment Research. Source: Compustat, Goldman Sachs Global Investment Research.

Corporate cash payouts are similar to historical averages EPS-linked compensation doesn’t appear to drive buybacks S&P 500 cash return payout ratios, % of net income 2018 spending among S&P 500 firms with/without EPS-linked compensation packages, $ bn, % of cash spending (below) 200 EPS-linked compensation 180 2018 aggregate spending ($bn) 160 Incentive comp. # of % of Invest Return to Return to investors metrics firms firms for growth investors Buybacks Dividends 140 EPS-linked 247 49 % $663 $635 $362 $274 Dividends 120 + net buybacks Not linked to EPS 253 51 801 648 449 199 100 All S&P 500 500 100 % $1,464 $1,284 $811 $473

80 88% % of total cash spending 60 Incentive comp. # of % of Invest Return to Return to investors metrics firms firms for growth investors Buybacks Dividends 40 Avg total cash return 34% EPS-linked 247 49 % 51 % 49 % 28 % 21 % payout ratio: 73% 20 Dividends Not linked to EPS 253 51 55 45 31 14 0 All S&P 500 500 100 % 53 % 47 % 30 % 17 % 1880 1900 1920 1940 1960 1980 2000 2020 Source: Robert Shiller, Compustat, Goldman Sachs Global Investment Research. Source: Compustat, FactSet, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 5 Top of Mind Issue 77 InterviewEl with Aswath Damodaran

Aswath Damodaran is a professor of finance at New York University Stern School of Business and holds the Kerschner Family Chair in Finance Education. He has authored several books on equity valuation, corporate finance and portfolio management. Below, he argues that buybacks do not come at the expense of investment, but rather help redirect cash towards better investments. The views stated herein are those of the interviewee and do not necessarily reflect those of Goldman Sachs.

Allison Nathan: How should the $800 billion worth of cash used for buybacks in the US last companies decide when and how to year go? That money didn’t just disappear; shareholders deliver cash back to shareholders? typically use their returns to invest elsewhere in the market. So it’s not that companies are investing less; it’s that different Aswath Damodaran: It’s one of the companies are investing. And so the question is not whether simplest of all corporate finance you want companies to invest or to buy back shares, but rather decisions, determined by whether you which companies you want investing: the aging companies of can earn a return for your investment the last century, or the newer companies that have better that is greater than what people can investment opportunities today? Choosing the latter should make elsewhere, often referred to as redirect cash from bad businesses to good businesses, a “hurdle rate.” For example, if people boosting the economy in the long run. can make 8% elsewhere, you need to expect to make more than 8% from your reinvestment; if you cannot find investment Allison Nathan: But are these cash-rich companies that generates a return greater than that hurdle rate, then it is engaging in buybacks just not looking hard enough for better to give the money back to your investors. opportunities to innovate? Allison Nathan: Why have buybacks become such a Aswath Damodaran: You can look as hard as you want. You popular means of returning cash in recent decades? can make a reincarnated Steve Jobs the next CEO. But you can’t change many of these businesses. The fact of the matter Aswath Damodaran: In fact, I’m surprised that buybacks is that many of the companies engaging in the largest buybacks haven’t grown faster and this trend didn’t start earlier. If you are in the late stages of their lifecycles, and you can’t reverse look at history, part of the reason companies started paying that aging. Are some companies buying back stock that dividends was because bonds predated stocks. So when shouldn’t be? Absolutely, because the forces of inertia and me- stocks were first listed, the only way you could get investors to tooism are strong in companies. Some companies buy back buy them was to dress them up like bonds with a fixed stock just because they have done so every year, or because dividend basically mimicking a coupon. other companies in the sector buy back stock. If a company But dividends have never made sense as an equity cash flow. buys back stock for the wrong reasons and good investments The essence of buying stock in a company is laying claim to are turned down, that is troubling. But addressing that problem whatever receivable cash flow is not otherwise being used. requires a scalpel not a bludgeon. If you ban buybacks across That means it should be different every year. But dividends the board to protect yourself from the few companies that are historically are sticky. Buybacks, on the other hand, can be doing stupid things, you’re going to end up with a lot of bad thought of as flexible dividends that allow companies to return investments at some companies, or none at all, if these more cash in years when they have more cash, and less or companies just sit on the cash instead. none at all when they don’t. Allison Nathan: But even if reinvestment opportunities are Thirty years ago, I could have given you a list of hundreds of limited in terms of their products or businesses, can’t companies that had solid, predictable earnings and therefore these companies be investing more in their employees could afford to pay a fixed dividend. But given that fewer and through higher wages, better benefits, etc.? fewer companies can count on earnings in this period of Aswath Damodaran: That’s a fair question. But many of these globalization and increased competition, it’s no wonder that companies already can’t earn a decent rate of return because companies have increasingly shifted to flexible dividends in the they are struggling to compete with high cost structures and form of buybacks. This is true even for successful companies legacy costs. And if you pay your employees more, like Apple, which has substantial cash flow today but realizes— competitiveness will likely suffer further. This could create a unlike the great companies of the last century—that it can’t vicious cycle, in which wages rise initially, but ultimately the count on having that cash flow for the next fifty years, company shrinks even faster and hires fewer people, or especially in businesses where numerous companies have reduces the size of its workforce altogether. You might end up quickly gone from stars to dogs. with some happier, well-paid employees who remain in the Allison Nathan: Shouldn’t we be concerned that the trend company, but a smaller number of them. Look at Europe, of using cash for buybacks is reducing investment? which has some very well-paid older factory employees but one of the higher unemployment rates in the world, likely in Aswath Damodaran: This hits on one of the great myths part because maintaining higher wages for existing employees about buybacks: that they come at the expense of investment. has undercut the ability to hire new employees. This might be a Are companies investing less? The companies that are buying reasonable trade off. But you can’t expect to legislate your way back stock are investing less. But the key question is where did

Goldman Sachs Global Investment Research 6 Top of Mind Issue 77

El

to a low unemployment rate, lots of new jobs and higher as you often see with family group companies or founder- wages for all your existing employees—that’s just not realistic. controlled firms. So you might not like the methods that activists use or the consequences of their actions, but without Allison Nathan: But, more broadly, shouldn’t employees be them small and passive investors would be in trouble. receiving a greater share of the gains of profitable companies, and how do you achieve that then? Allison Nathan: There’s a market narrative that companies have been taking on debt to buy back stock. How Aswath Damodaran: I agree that labor needs to get a bigger concerning is this trend and does it raise systemic risk? slice of the pie. Over the last 30 years capital has acquired power at the expense of labor largely because capital is more Aswath Damodaran: I look closely at financial data at the start mobile, which has been particularly valuable in the current age of every year—computing every conceivable ratio for every of globalization. But economies move in cycles, and there have publicly traded company—and I am just not seeing this; in my been—and likely will be again in the future—periods when calculations, debt ratios of US companies have not changed labor has the upper hand. I know that’s small consolation for significantly over the last 15 years. A mistake that’s commonly the factory worker facing stagnant wages today. But if you try made is to look at just S&P 500 companies. But these are the to intrude in the process and fix it, even well-intentioned most mature companies that have an ability to borrow more, legislation is likely to create a new set of problems. So I am not and tend to buy back the most stock for the reasons we’ve sure there is an easy way to give labor a larger slice of the pie discussed. Separately, I’ve also found that the most debt-laden by just forcing the pie to be cut in a different way right now. companies are actually generally not the ones buying back the most stock. Broadly speaking, there’s a danger in looking at Allison Nathan: It’s hard to argue with the fact that only subsets of data, or anecdotal data. Of the 7,300 publicly company executives are often times largely paid in stock. traded companies in the US, can I find companies that are Could this be distorting incentives for buybacks? highly levered and are borrowing money to buy back stocks Aswath Damodaran: When the method of compensation that shouldn’t be? Of course; I can find examples of companies favored options in particular this was a key issue; you can make doing all sorts of strange things. But extrapolating these an argument that dividends went out of fashion in the 1990s in anecdotes to a generalized rule is often very misleading. part because if you paid a dividend, the stock price typically Allison Nathan: So what would happen if buybacks were dropped, which was not a good thing if you were getting paid restricted? How do you think companies would respond? in options. But these days executives are increasingly paid with restricted stock, which means that they have an equity stake, Aswath Damodaran: Companies, especially older companies, sometimes with long vesting periods and/or restrictions on would love it, because it would be the perfect excuse for them selling stock once they receive it. to sit on a pile of cash without having any pressure from shareholders or activists to return it to them. This is not a Of course, if buybacks automatically increase the stock price, hypothetical. Take a look at the walking dead zombie then executives that are paid in stock benefit. But there is no companies in Europe to see exactly where we’ll end up if direct link between buying back shares and increasing the buybacks are banned. In Europe, a myriad of factors tend to stock price. Buybacks in and of themselves do not create value, leave capital tied up in old, aging companies, leaving less they just return cash. And even if there is an initial bump in the capital for the younger, more exciting companies in new stock price on the announcement of a buyback, if buybacks are businesses. This is not where we want to be. coming at the expense of good projects and hurting the company in the process, executives are ultimately hurt as You know who else would love it? Investment bankers, restricted stockholders. Executives want the stock price to rise because now that cash would be burning a hole in the pockets just as much as any shareholder, and doing buybacks in and of of corporations, providing a greater incentive for them to itself doesn’t achieve that; doing buybacks for the right reasons pursue acquisitions—the mother lode of all deal making. In does—and all stock holders will share in those benefits. short, groups that such a policy might have intended to discipline could end up as the main beneficiaries of it. Business Allison Nathan: What about hedge fund activists? Don’t history is full of unintended consequences of legislation, and I they pressure companies to pursue buybacks specifically can almost promise you that will occur again if Congress bans to generate short-term gains that they can cash out on? buybacks. Aswath Damodaran: It’s true that activists might pressure a But I can tell you what won’t occur if buybacks are banned: the company to return cash and then cash out quickly; realistically, return of manufacturing jobs. We already learned that from the they tend to be selfishly motivated by profit. But I think of experience of tax reform in 2017; proponents argued that activists as needed irritants in the system. You need people allowing companies to bring back their trapped cash would lead who will confront company management and demand that if to a surge in manufacturing. We have not seen new factories they can’t make good investments, they should return cash to built because the underlying economic fundamentals just don’t shareholders. On the flip side, imagine a world without support it. But I believe that tax reform was worth it, because activists. Managers would have such incredible power over that cash found its way into the market, and from there, into shareholders that they could do whatever they want with your other companies in the economy. money. This is when corporate governance truly breaks down,

Goldman Sachs Global Investment Research 7 Top of Mind Issue 77 InterviewEl with William Lazonick

William Lazonick is emeritus professor of economics at the University of Massachusetts, president of the Academic-Industry Research Network, and an Open Society Fellow. He previously held professorial positions at Barnard College of Columbia University, INSEAD, and Harvard University. Below, he argues that stock buybacks divert cash away from investments in productive capabilities and innovative products. The views stated herein are those of the interviewee and do not necessarily reflect those of Goldman Sachs.

Allison Nathan: Why have buybacks argument that not meeting “hurdle rates” justifies engaging in become such a popular tool for US buybacks rather than re-investing is nonsensical and rarely companies? made by successful CEOs who understand the need, in the face of uncertainty, to invest in future products to remain in William Lazonick: I attribute this business. That’s because it’s impossible to know what an trend in large part to a major and innovative investment will yield; by that calculation, Apple unfortunate transformation in the would have never made the investment in the iPod, iPhone, ideology of corporate governance that and iPad. occurred from the mid-1980s, namely that companies should be run to The only question good CEOs grapple with is what productive maximize shareholder value. This ideology gained legitimacy in capabilities to invest in, not whether or not to invest. They business schools around that time, but the shift was part of a make investment decisions based on strategic vision and an larger evolution in US economics and politics. Challenges facing understanding that key capabilities must be developed over US corporations in part owing to the conglomeration time by investing and retaining people who can engage in movement of the 1960s led to a backlash beginning in the organizational learning. 1970s; the prevailing view became that it was better to bust up Allison Nathan: But aren’t there at least some instances these companies, take the money out of them, and distribute it where the cash could be put to even better use by elsewhere. The fact that some of the strongest US industries returning it to shareholders who can redirect it to more began losing out to Japanese competition reinforced this view. promising opportunities elsewhere in the economy? So the idea was born that it was better to “downsize and distribute” than to “retain and reinvest.” William Lazonick: Not in my view. There is no shortage of financing in the economy, and particularly in venture capital, so On top of this, the election of Ronald Reagan on a platform of there is no need to “redirect” cash. I’d argue that any shortage deregulation and free market economics paved the way for the of finance in venture capital ended on July 23, 1979—the date November 1982 adoption by the Securities and Exchange that pension funds were given the greenlight to put up to 5% Commission (SEC) of Rule 10b-18, which I call a “license to of their portfolio into risky assets without being liable for the loot”. The rule provides a safe harbor against charges of stock misuse of resources. The only shortage is in investment in market manipulation for companies buying back their own productive capabilities and innovative products, which implies shares as long as the stock repurchases remain within a certain that companies should be instead directing their cash towards range of the companies’ previous average daily trading volume. organizational learning, including, but not limited to, R&D. So This gives corporate executives permission to do large-scale the argument that this money is needed for alternative uses buybacks. Indeed, legitimized by the increasingly popular doesn’t fly. “maximizing shareholder value” ideology, a surge in buybacks soon followed Rule 10b-18’s adoption. Allison Nathan: So you basically see the rise in buybacks as a problem of corporate governance? As this ideology evolved, companies were ever-more judged by their stock yields, and they began to compete to keep their William Lazonick: Yes. Again, the key issue is that CEOs are stock prices up, in part through buybacks. They could also use often too focused on boosting the stock price through buybacks to help reverse major downturns in the market, with, buybacks and other means given today’s pervasive for example, IBM one of the first companies to buy back stock “maximizing shareholder value” ideology, which has been after the October 1987 crash. But contrary to what is often amplified by pressure from hedge fund activists looking to assumed, most buybacks occur when stock prices are high, extract value from companies. And let’s not forget that which aligns with the notion that companies are competing in executives have substantial personal incentives for a high stock terms of stock price performance—and buybacks remain a price since a large portion of their compensation comes—in favorite means of achieving this end. one way or the other—in the form of stock. It’s no coincidence that executives typically benefit from stock price bumps Allison Nathan: Couldn’t companies be buying back stock resulting from buybacks, realizing greater gains from the because they just don’t have a better way to use the cash? exercise of stock options and the vesting of stock awards. William Lazonick: Some economists make this argument Executives who become so focused on the company’s stock because they believe that quantitative financial tools like price may lose the strategic vision required for the companies calculating net present value can be used to evaluate they lead to innovate and remain competitive. investments in new technology and innovation. But the

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Allison Nathan: What have you found are the corporate shareholders never invested in the company; they just consequences of this behavior? purchased shares on the stock market. And, through stock price manipulation, buybacks benefit share sellers, including William Lazonick: We have done in-depth firm-level research executives, not shareholders. It’s reasonable for companies to that shows that financialized companies ultimately lose out. pay dividends from profits that they can afford after reinvesting Take Cisco Systems, which in 2001 was positioned to become in the company. Dividends on common shares are not the world leader in carrier-class communications infrastructure inflexible. Companies can adjust dividends at any time; they equipment as wireless was gaining traction. But they largely just don’t like to cut them because Wall Street typically views abandoned investment in some of the most promising such moves negatively. But dividends alone can be too high, technologies as the company did massive buybacks. Today, leaving inadequate earnings for reinvestment in productive Cisco is still the biggest player in enterprise networking, but it capabilities. We see this more often in Europe, where is a non-entity in the more sophisticated service provider buybacks are less common but many companies issue high technologies. Instead, leaders in this area are Huawei and dividends that undercut reinvestment. In the end, dividends Ericsson—exceptionally innovative companies that have been should be issued only after everything else is taken care of so insulated from stock market pressures; Huawei is employee- that they don’t undermine the future of the company. owned and not listed on a stock market, while Ericsson is controlled by dual class shares. We’ve found similar patterns in Allison Nathan: So if European companies engage in less other industries like pharmaceuticals. The key point is that buybacks, which you see as killing innovation, why is companies that start down the path of doing a lot of buybacks European industry widely considered less innovative than generally cease to be innovative. And companies that retain American industry? and reinvest are the ones that become industry leaders. William Lazonick: I would generally agree that the US has Allison Nathan: What about broader economic been a much more propitious place to invest in innovation consequences? because of US government investment in computer technology, life sciences research, aeronautics and other William Lazonick: These dynamics have been a major source technology fields as well as institutions that support of income inequality, leading to very high incomes for company entrepreneurship. What the United States has to worry about is executives—not to mention hedge fund managers who time the fact that, despite all of these advantages, the rest of the the buying and selling of shares around buybacks—at the same world—and particularly China—is catching up. And the US will time that most American workers experience stagnating pay eventually lose out if the current trends continue. It has already and unstable employment. It’s not a matter of “it would be nice lost out in communications infrastructure to Chinese and if we could pay employees more.” Employees, in fact, European competitors; clean energy technology is another generate the value in these companies. So when executives example of an industry where we’ve lost ground. fail to reinvest in their companies and employees, value is being taken away from their workers. Allison Nathan: So what policies do you propose? Allison Nathan: It’s argued that if companies pay workers William Lazonick: First, rescind rule 10b-18 and make open more, they risk becoming less competitive, which could market stock repurchases illegal. I also think there should be an ultimately lead to shrinking profits and the need to lay off end to stock-based pay because speculation in and workers, etc. Is there any merit to this? manipulation of the stock market divorces stock-based remuneration from innovative performance. In general, we William Lazonick: The economists making these arguments should reward executives over a long period of time for actual have no idea how companies become productive. Many value creation, such as expanding competitive products. But for studies have shown that the companies that treat their workers such changes to have real value we need a shift in the ideology well, compensate them for the value they create, and provide of corporate governance that puts employees first and an environment that entices them to stay achieve greater shareholders last in the rank-ordering of corporate productivity, which is what allows the companies to remain constituencies. One way to begin to do this is to involve competitive. Remember, the purpose of a company is to workers in the decision-making process, by including them on produce a product that can be sold, not make a profit. But if the board and establishing employee-populated works councils companies do that well, profits follow. And who do those that provide input to management, as occurs in Germany today. profits belong to? I strongly believe they belong to the And I think we need to find more ways to give people long employees who created them, and certainly not to careers, even in today’s environment in which globalization has shareholders who have in reality not invested in the company made employment stability more difficult. For example, at all, but have just bought shares on the market to receive a Denmark’s flexicurity system tracks people who have been laid yield through dividends or through capital gains as the company off and ensures that they keep their skills up until they find produces and innovates, thanks to the employees. another job for the next stage of their career. Allison Nathan: Why are dividends not as bad as buybacks These are admittedly big changes for US business. But even in your view? Aren’t they both just means of returning arriving at the point—as we have today—of having people ask cash, but buybacks provide more flexibility to companies about and try to understand the relation between corporate on when to do so? governance and innovative performance, I view as real and William Lazonick: Neither buybacks nor dividends “return” encouraging progress toward these desired outcomes. cash to shareholders because the vast majority of public

Goldman Sachs Global Investment Research 9 Top of Mind Issue 77 HistoryEl of buybacks

Goldman Sachs Global Investment Research 10 Top of Mind Issue 77 WhatEl if there were no buybacks?

shares when their stock prices tumble. Quarterly buyback Arjun Menon argues that halting buybacks could blackout periods, which begin around five weeks prior through reduce EPS growth, multiples, and index levels, two days after a company releases earnings, provide a glimpse of what this might look like. During these periods, companies and temper downside support for equities are restricted from executing discretionary buybacks and therefore tend to repurchase fewer shares (see pg. 14 for Buybacks have been the single largest source of US equity details.) While a blackout period is not a pure “no buyback” demand each year since 2010, averaging $421 billion annually1. scenario, we believe it provides a reasonable proxy for a In comparison, during this period, average annual equity dramatic decline in repurchase activity. demand from households, mutual funds, pension funds, and foreign investors was less than $10 billion each. As a result, in During the past 25 years, the 20th percentile return for stocks a world of no buybacks a significant shift in the supply-demand within the S&P 500 has averaged -27% (annualized) during structure for equities would likely occur. So what would this buyback blackout periods compared with -16% when mean for equity markets? companies can freely buy back their shares. The average (11% vs. 5%) and 80th percentile (61% vs. 40%) stock returns are Decomposing demand also higher during buyback blackouts likely due to the boost Net US equity demand ($ billions) from quarterly earnings releases. In addition to its impact on Category 2014 2015 2016 2017 2018 returns, return dispersion (16 pp vs. 14 pp) and volatility (16.4 Corporations $ 442 $ 508 $ 697 $ 296 $ 509 vs. 15.8) during blackout windows have also been higher Households 95 (138) (151) 226 191 compared with non-blackout periods. Taken together, removing Life Insurance (5) 31 98 (45) (18) or limiting buybacks would almost certainly create downward Foreign Investors 114 (191) (188) 125 (94) Mutual Funds 95 58 (112) (134) (124) pressure on equity prices and widen trading ranges. Pension Funds (272) (7) (217) (162) (243) Other 12 (7) (12) (17) 9 Wider ranges less S&P 500 performance since 1995 in buyback blackout/non-blackout Foreign equities by US 432 197 22 167 128 periods, % annualized Credit ETFs 50 57 96 123 100 100 %

Included among holders above are: Stocks trade in wider 80 % Equity ETF purchases $ 191 $ 174 $ 188 $ 347 $ 210 ranges in periods when Source: Federal Reserve Board and Goldman Sachs Global Investment Research. 80th %-ile buybacks are limited 60 % #1: Lower EPS growth and P/E multiple contraction From a fundamental perspective, removing buybacks would 40 % have a negative effect on EPS growth. Aggregate earnings Average 20 % 10.8 growth trails EPS growth because buybacks boost earnings per 5.2 share by reducing the number of shares outstanding. During 0 % the past 15 years, the gap between EPS growth and earnings growth for the median S&P 500 company averaged 260 bp (20)% (11% vs. 8%). In 2018, the spread equaled 200 bp (20% vs. 20th %-ile 18%). Another approach to estimating the boost to EPS growth (40)% Blackout Non-blackout in excess of earnings growth is the net buyback yield2.This Source: FactSet and Goldman Sachs Global Investment Research. yield reflects the percent of market cap repurchased during the trailing 12 months. The S&P 500 net buyback yield averaged The risk: a downward shift in equity demand 2.6% during the past five years, close to the actual 290 bp gap However, our index sensitivity estimates could prove to be too between median EPS and earnings growth (10% vs. 8%). conservative if prohibiting buybacks also increases the supply Hence, we estimate a hit to forward EPS growth expectations of equities relative to demand at current prices. Theoretically, a of around 250 bp in a world without buybacks. downward shift in the demand curve should lead to a decline in This, in turn, could lead to P/E multiple contraction. During the prices, all else equal. Although average returns during blackout past 30 years, a 250 bp lower expected FY2 EPS growth has periods have been higher than in non-blackout periods, corresponded with a roughly one multiple point lower forward eliminating or curtailing the largest source of equity demand P/E multiple for the median S&P 500 stock. could potentially shift the demand curve substantially lower if other investors are unable to replace the corporate bid at #2: Lower index levels, wider trading ranges and higher vol current prices, which we view as unlikely. Prohibiting buybacks would reduce downside support for equity prices since companies could no longer step in to repurchase Arjun Menon, US Equity Strategist Email: [email protected] Goldman Sachs and Co. LLC Tel: 212-902-9693 1 Federal Reserve’s Financial Accounts quarterly report (Z.1), measured as gross repurchases minus share issuance plus M&A. 2 Calculated as share repurchases minus share issuance, divided by the starting market cap.

Goldman Sachs Global Investment Research 11 Top of Mind Issue 77 InterviewEl with Steven Davis

Steven J. Davis is the William H. Abbott Distinguished Service Professor of International Business and Economics at the University of Chicago Booth School of Business. He is also is a senior fellow at the Hoover Institution, advisor to the U.S. Congressional Budget Office, and visiting scholar at the Federal Reserve Bank of Atlanta. Below, he argues that banning stock buybacks could trap resources in older/larger firms, hindering efficient capital allocation and job creation. The views stated herein are those of the interviewee and do not necessarily reflect those of Goldman Sachs.

Allison Nathan: Stock buybacks output growth in the economy, but don’t employ that many haven’t been a focus of your people relative to what they produce. research. But there’s a narrative In contrast, some of the most employment-intensive activities that restricting companies from in the economy occur among smaller and younger businesses returning cash to shareholders by that may not always be as productive or innovative. But the banning buybacks will lead to more jobs they create allow people to earn a living and engage investment and more jobs. Given productively in society, which also serves an important your research on business formation and job creation, where economic and social function. So there are big differences

is this narrative right/wrong? across firms in terms of how important they are for growth and innovation versus how important they are for jobs. But both are Steven Davis: I think the narrative is largely wrong. Stock important in the grand scheme of things. And that ties back to buybacks don’t affect the level of investment in the economy; our earlier discussion because if things like restrictions on stock they affect where that investment goes. To see that point, buybacks trap capital in older businesses, that means there will suppose I'm an investor and I've got $100,000 in my stock be less capital available for young businesses, which are an portfolio because that's how much I want to put in stocks. If a important source of jobs. company buys back $10,000 worth of my shares, that doesn't change how much I want to invest in stocks. So I'll take that Allison Nathan: But aren’t the largest, richest companies— who typically buy back the most stock—best placed to $10,000 and invest it in some other stock. create jobs if they instead reinvest? And what are the implications for income inequality if they don’t? Stock buybacks don’t affect the level of Steven Davis: The reality is closer to the reverse. Empirically, investment in the economy; they affect we find that larger, mature firms tend to hire more educated, where that investment goes.” skilled and experienced workers, who already have relatively high incomes and relatively good opportunities. Meanwhile, Now, if a company is banned from buying back its stock, the smaller and younger businesses tend to hire younger and less amount of investment in the economy doesn’t change, but educated workers compared to bigger, more established those resources are instead trapped inside a company that businesses. So trapping resources in larger and older doesn’t have a great use for them. How do we know that? businesses not only shrinks the overall size of the pie, as we Because if they did have a great use for them, they would have discussed, but also tends to reinforce the unequal distribution invested them internally in the first place. And the of the pie. If we really want to provide good jobs and earnings underappreciated reality is there are enormous differences in opportunities for people at the lower end of the learning and productivity and investment opportunities across firms no skills distribution, we should let investment flow to the younger matter the region, size or industry, and these opportunities are and smaller business that tend to hire these workers in larger always changing as circumstances shift. So, ideally, we want numbers, rather than forcing investible resources to remain in the capital markets to take the money investors are willing to mature companies. invest at any point in time and allocate it to the best uses so as to drive growth, productivity, innovation and job creation— maximizing the overall size of the pie. But if we restrict how Trapping resources in larger and older corporates can use their cash, we undermine that process of businesses not only shrinks the overall size of allocating investable resources to their best uses. the pie… but also tends to reinforce the Allison Nathan: How do we prioritize across “best uses” unequal distribution of the pie.” given that some of these goals—like increasing productivity vs. creating jobs—don’t always go hand in Allison Nathan: You’ve discussed how banning buybacks hand? would create economic distortions. But do buybacks themselves create economic distortions? Steven Davis: You’re right that they don’t always go hand and hand, which I also think is generally underappreciated. We tend Steven Davis: I think there are some economic distortions to want growth because we assume growth creates jobs, and associated with buybacks, but these are really a function of to a large extent that’s true. But some companies, such as tech deeper features of our financial and tax system. For example, firms in Silicon Valley, play a major role in driving innovation and many aspects of our tax system favor debt financing over

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equity financing. And to the extent that buybacks are an Second, reduce labor market restrictions and regulations. attempt by some companies to alter their financing away from These have grown enormously over time. One of the best equity and towards debt, that can be a concern. This is documented examples is the rise of occupational licensing especially the case if companies become highly leveraged, restrictions, which are usually imposed at the state and local leaving the overall system vulnerable. But here buybacks are level. The share of jobs in the US that require a government- really a symptom of the distortion, while the tax system is the mandated license has risen from about 5% in the 1950s to deeper cause. So the fix has nothing to do with buybacks, but about 20-25% today. These licensing restrictions apply to would instead entail giving debt and equity financing more hairdressers, dog groomers, landscapers, interior designers, equal treatment under the tax code. massage therapists, and hundreds of other occupations—often for jobs at the lower end of the earnings distribution. And the occupational licenses are usually not reciprocal across state I think there are some economic lines. So even when somebody jumps through all the hoops of distortions associated with buybacks, but training, and testing, and apprenticeship, and cash out of pocket to become licensed in one state, if they move to these are really a function of deeper features another state, they often have to go through the whole process of our financial and tax system.” again. That makes it harder for people to relocate to where jobs are plentiful and earnings opportunities are good. It also makes Allison Nathan: All that said, it doesn’t always seem like it harder to start or grow businesses more broadly, because the resources in the economy are well-allocated today. Can’t business must employ licensed workers to expand. policy help? Third, revamp business regulations and zoning restrictions at Steven Davis: The problem is that it’s very difficult for the the local level to lower business startup costs. These government to efficiently direct resources through social and regulations and restrictions differ across local jurisdictions, and economic policy. A better way to achieve this goal is to lower no single one of them might seem particularly important. But if the regulatory and other barriers that inhibit capital reallocation, you're starting a business, understanding and complying with the formation of new companies, and the growth of young all of these different rules is expensive and time consuming, ones. Historically, the United States has been a successful and therefore inhibits the formation of many businesses and economy in large part because it has had a more hospitable the growth of many others. Likewise, we’ve seen an enormous environment for new business formation and for the expansion in the scale, scope and complexity of the regulatory development and growth of successful businesses. But that system at the federal level. This expansion, which happened environment has deteriorated somewhat over the decades. So over decades under both republican and democratic the role for policy should be to re-create that favorable administrations, involves environmental, labor and product environment, which will benefit everybody and especially market regulations and much more. people at the lower end of the skill distribution. The combination of all these regulatory factors makes for a Allison Nathan: What policies could help re-create that much more complex and costly business environment, the environment? burden of which often falls heavily on younger and smaller Steven Davis: For one, simplify the tax code—not just the businesses, and, in turn, on the younger and less educated corporate tax code, but also the treatment of business income workers they tend to hire. Streamlining regulations and under the individual tax code and in areas like unemployment reducing compliance costs would help re-create an insurance and the myriad other taxes that businesses wrestle environment that fosters new business formation, greater job with. Navigating the complexity of the tax code is a challenging, opportunities for people who need them most, and a more costly burden for people trying to start or grow small prosperous economy. businesses today.

Goldman Sachs Global Investment Research 13 Top of Mind Issue 77 Q&A:El stock buyback mechanics

We sit down with Neil Kearns, head of Goldman Sachs’ corporate trading desk, to address the size, impact, and outlook for US share repurchases. The interviewee is an employee of the Goldman Sachs Securities Division, not Goldman Sachs Research. The views stated herein are his own and may not necessarily reflect those of Goldman Sachs.

Q: How large is the corporate bid in the stock market? A: US corporates have been the largest net buyers of US equity for the last decade, repurchasing $5tn+ since the financial crisis. Last year, roughly $1.1 trillion of repurchases were authorized, with about $900 billion actually repurchased. As a share of the overall trading footprint, that’s around 6-7% of average composite volume, which might be viewed as a slightly underwhelming number. But companies repurchase stock under rule 10b-18, a safe harbor enacted by the SEC in 1982 to provide companies an affirmative defense against accusations of stock price manipulation. This rule provides volume, timing and price limitations on how companies buy back stock. Pulling out the non-eligible volume, the trading footprint increases to about 10% on average, and into the teens during market weakness. Q: What is the major driver of volatility in share repurchases? A: The largest driver of share repurchase volatility is broader equity market performance. In particular, the corporate bid tends to become more aggressive in a falling market as fundamental investors move to the sidelines. In periods of extreme dislocation, like we witnessed at the end of last year, repurchase activity can temporarily spike by multiples of average levels, as companies take advantage of attractive price points/valuations, and which may ultimately also have a secondary effect of tempering price volatility. That said, companies are cognizant of their trading footprints and generally aim to be less than 10% of trading volume. Q: How much seasonality is there in share repurchases? A: There is not a great deal of seasonality. Q1 tends to be the lightest quarter of activity—about 23% of total annual notional— given that companies have the least visibility on what earnings will look like that year. Q2 tends to be a little bit more active at around 24%, while the last two quarters average around 26 to 27%, as companies feel more confident in repurchase levels given greater clarity on earnings strength/cash flow generation in the second half of the year. Q: We are in the midst of a blackout window for share repurchases, which occurs four times a year around quarterly earnings. Does that mean companies can’t buy stock? A: No. The other rule relevant to share repurchase programs is 10b5-1. The SEC enacted this rule in 2000 to provide senior executives, who have a desire to sell equity, an affirmative defense to any charge of insider trading, by adopting a written plan to sell at a time when they are not in possession of material non-public information (MNPI). The plan is a written contract between the individual and their broker, and contains very specific instructions on trade dates, sale parameters, etc. Though the plan may extend through a blackout window when the individual possesses MNPI, because it’s ultimately on auto-pilot, the executive is protected. Companies have applied this same safe harbor to buyback programs, enacting plans before the blackout window that will run on auto-pilot during the window. Very little public information is available on 10b5-1s, but an internal analysis of 350 companies suggests that approximately 85% of companies utilize them to continue to purchase stock during closed windows. Companies do tend to be more conservative than in the open window (when they have access to real time information); we observe a notional spend reduction of ~30% during the blackout window. Q: How do companies judge the success of their stock repurchase programs? A: From an execution standpoint, most companies judge the success of their program by comparing the average price at which they’ve purchased their shares on any given day, to the volume weighted average price (VWAP)—a daily benchmark that is readily available on Bloomberg. If their purchase price is below VWAP, they’ve “saved” money. Given the billions of dollars spent annually on share buybacks today, senior management and more frequently, corporate boards, have become increasingly focused on execution performance versus the daily benchmark, in some cases adjusting the structure of their program to specifically achieve this. In my view, this narrow focus on daily VWAP has the potential risk of missing more attractive valuation opportunities. Q: How would you judge investor focus on stock buybacks today? A: Focus from the buy side community is at an all-time high, with investors frequently questioning whether the very strong corporate bid we’ve observed over the past decade will persist, and looking at this as a potential harbinger of equity market performance. But if investors are looking to share repurchases for market direction, they are probably one or two quarters behind; corporate earnings drive share repurchases—not the other way around. Q: Do you see any evidence that the corporate bid is diminishing, especially given increased focus in Washington, DC? A: Not currently. Share repurchase authorizations are up approximately 13% yoy, which is remarkable given the surge in buybacks last year. And more broadly, the US economy continues to do reasonably well, the Fed appears to be on pause, and US-China trade negotiations are moving in the right direction. So we have little reason to believe that US corporates will not continue to generate strong free cash flow, which, as I mentioned, has historically been the primary driver of stock repurchases.

Goldman Sachs Global Investment Research 14 Top of Mind Issue 77 USEl buyback background

M ost S&P 500 firms repurchase some shares… …though 10 firms made up 64% of buyback growth in 2018 Trailing 12m buybacks as share of average market cap, % Spending among firms accounting for the largest share of S&P 500 buyback growth 500 Share repurchases Capex and R&D Capex+ 0% mkt cap Spending Change % of Spending Change R&D to 15% Company 2017 2018 $ bn % SPX chg 2017 2018 $ bn % Sales repurchased Apple (AAPL) $34 $74 $40 116 % 15 % $24 $29 $5 19 % 11 % 400 Oracle (ORCL) 4 29 25 637 9 8 8 -1 (8) 19 20% < 1% QUALCOMM (QCOM) 1 24 22 1695 8 6 6 0 (3) 29 8 23 15 195 6 7 7 0 5 14 300 Cisco (CSCO) Amgen (AMGN) 3 18 15 435 5 5 5 0 4 20 Wells Fargo (WFC) 10 23 13 124 5 0 0 0 NM 0 200 1% - 5% 46% Bank of America (BAC 13 25 12 92 4 0 0 0 NM 0 Facebook (FB) 5 16 11 208 4 14 24 10 67 43 Broadcom (AVGO) 0 11 11 NM 4 4 4 0 3 21 100 AbbVie (ABBV) 1 12 11 752 4 6 11 6 94 35 > 5% 19% Top 10 $81 $255 $174 216 % 64 % $75 $95 $20 26 % 13 % 0 Other 490 460 556 97 21 36 856 955 99 12 9 1992 1996 2000 2004 2008 2012 2016

S&P 500 $540 $811 $271 50 % $931 $1,049 $118 13 % 9 % Source: Compustat, Goldman Sachs Global Investment Research. Source: Compustat, FactSet, Goldman Sachs Global Investment Research.

Buybacks are typically more volatile than dividends… …and closely track earnings growth Trailing four-quarter growth, % yoy Trailing four-quarter growth, % yoy 120 120

100 100

80 80

60 Buybacks 60 Buybacks 40 40

20 20

0 0

(20) (20) Dividends (40) (40) Earnings

(60) (60)

(80) (80) 1990 1995 2000 2005 2010 2015 2020 1990 1995 2000 2005 2010 2015 2020 Source: Compustat, S&P, Goldman Sachs Global Investment Research. Source: Compustat, FactSet, Goldman Sachs Global Investment Research.

Buyback activity differs by sector… …and stocks with high buyback activity have lagged of late Buyback yield by S&P 500 sector GS buyback basket (GSTHREPO) vs. S&P 500

Info Tech 5.0 106 Financials 4.6 Industrials 3.3 104 S&P 500 3.2 Health Care 3.1 102 Cons. Discretionary 3.0 100 Materials 2.5 Energy 2.1 98 Cons. Staples 1.7 Comm Services 1.4 96 Real Estate 0.6 Utilities 0.4 94 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Oct-19

Source: FactSet, Compustat, Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 15 Top of Mind Issue 77 ExplainingEl the transatlantic buyback gap

more common in the US than in Europe, and they frequently Sharon Bell argues that share buybacks will pursue more aggressive balance sheet strategies. Finally, many likely rise in Europe, but are unlikely to reach European companies have large cross shareholdings or family ownership that prevent buybacks. the same degree of use as in the US #3: Visibility of quarterly EPS. In the US, investors tend to The boom in US share buybacks has left many investors asking focus on quarterly earnings, and buyback strategies can help why we don’t see a similar trend in Europe, or questioning companies meet targets. But, in Europe, far fewer companies whether one might emerge. Buybacks have started to rise in issue quarterly earnings reports. That said, European Europe, and we expect this trend to continue. But we doubt companies in more global sectors (e.g., healthcare, oil, and that European companies will embrace a more US-style mining) that report quarterly—and have a more international buyback culture. shareholder base—are more likely to buy back shares. The transatlantic buyback gap #4: Demand for stable income. Historically, European pension funds and insurance companies were the dominant holders of The gap between buybacks in the US and Europe is huge, and equities. Given their demand for liability matching and stable has not narrowed. Some of this owes to the simple fact that income streams, they often had a preference for companies the US stock market is bigger and US companies generate that pay dividends, rather than buy back shares. However, more cash. But even as a percent of cash usage, buybacks are these investors’ share of ownership has fallen as regulation has tiny in Europe (5%) compared with the US (25-30%). pushed many into bonds and other asset classes. Therefore, A large gap it’s doubtful that they are still exerting the same influence over US and European stock buybacks, % of cash management behaviour as in the past. 40% US Buybacks (% Cash) #5: Profitability. European corporates have had relatively weak earnings and cash flows in recent years, barely growing in 35% Europe Buybacks (% Cash) aggregate. So if buybacks are an opportunity to distribute 30% surplus cash to shareholders, European companies have simply had much less available. Nowhere is this truer than in 25% financials, where the priority has been increasing capital ratios, maintaining or increasing dividends, and then catching up in 20% terms of investment in technology. 15% #6: Legal restrictions3. Buybacks were only legalized in Europe beginning in the late 1990s (UK was the exception, with 10% buy backs possible since the early 1980s, as in the US) on 5% changes to domestic/EU law. Yet even post-legalization, various country-specific rules and restrictions have remained in 0% place; e.g., companies in the UK, Germany, France, and Spain 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 are only allowed to purchase up to 10% of outstanding shares Source: Datasteam, I/B/E/S, Goldman Sachs Global Investment Research. (vs. 15% in the US) within a 12 or 18-month period post- We see six drivers of this transatlantic divide on buybacks. approval. These and other restrictions—for example, in Germany shareholder approval of buybacks is required—have #1: European uncertainty. European companies tend to seek left buyback rules generally more stringent than in the US. a higher cash buffer, primarily due to the high cost of equity However, current restrictions do not appear particularly and low returns on cash owing to record-low interest rates. In onerous; even stocks in our repurchase basket (GSSTREPO)— theory, low interest rates would offer European companies the which have been selected specifically for their high level of opportunity to lever up and potentially disburse cash to buybacks—had just a median buyback of 3% of market cap in shareholders via stock buybacks. However, the low-rate 2017 and 2018. environment is generally viewed in Europe as a reflection of a The future (and implications) of European cash use very weak or uncertain path for growth and inflation. As a result, the preference for cash in Europe has remained Share repurchases are likely to continue to rise. In 2007, share relatively high. Indeed, unlike US companies that have been repurchases made up 12% of cash use (vs. 6% today), actively re-leveraging since the end of the global financial crisis, implying upside potential. However, the magnitude of buyback European companies have continued to de-leverage. growth remains unclear in large part because European corporates appear as focused as ever on paying dividends, as #2: Different share ownership structures. Management evidenced by rising pay-out ratios. This is likely because incentive schemes and employee stock programs are used European companies that have initiated or raised dividends more frequently in the US than in Europe, which leaves the have historically been outperformers, while outperformance of interests of management and employees more aligned with buyback indices has been much less clear. repurchase plans. However, in some European countries, workers’ councils or worker representatives on boards may 3 have more interest in using cash for reinvestment than in Share Repurchases in Europe A Value Extraction Analysis, Mustafa Erdem buying back equity. Additionality, activist investors are much Sakinc, The Academic-Industry Research Network.

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The dividend trend What about Japan? European LTM dividend payout ratio, % While Japanese stock buybacks hit a record for both 65 LTM Dividend Payout Ratio approved value and executions in FY2018, Japanese 5y avg 60 companies’ share repurchases are still relatively small 10y avg compared to both the US and Europe. However, we see 55 substantial scope for the number of companies buying back shares to increase from current levels given that corporate 50 governance reforms are placing greater scrutiny on inefficient 45 balance sheets. In this context, more companies are likely to opt for buybacks as a way to improve capital efficiency and 40 return value to shareholders. Indeed, we forecast buybacks

35 and dividends to reach a record ¥21.3tn ($191bn) in FY18 (the highest level since the global financial crisis), and to rise 30 another 15% yoy to ¥24.6tn ($221bn) in FY19. 75 79 83 87 91 95 99 03 07 11 15 19 Source: Datastream, Worldscope, Goldman Sachs Global Investment Research. All in all, we see four key factors driving our projected growth in share buybacks: One implication of the higher dividend/lower-buyback strategy of European managements is that comparing price indices • Ample cash. TSE1 firms (excluding financials) continue to between the US and Europe is probably unfair, as it doesn’t increase their liquidity, with ¥111tn ($996bn) as of end- include dividends and dividends reinvested. We estimate that March 2018; twice as many companies are cash rich in over 75% of returns on European equities in the last 20 years Japan than those in the US and Europe. have come from dividends (and reinvestment) rather than price. • Pressure to improve capital efficiency and unwind As such, the gap between US and European equities is much cross-shareholdings: Japanese firms’ ROE has remained smaller in total return terms as opposed to price alone. in single digits (%) for many years, which is low by global comparison. CEO approval ratings at annual general The US-Europe gap: now you see it, now you don’t meetings tend to be low at companies with low ROE. And US (S& P 500) and European (Worldscope total equity market) equities, while unwinds are unlikely to occur rapidly, cross- price (above) and total returns (below) shareholdings will remain a key focus of debate in 250 corporate governance reform, and we expect to see steady US reductions in cross-held shares in 2019. Europe 200 • Investors demanding higher shareholder returns: Japanese firms’ total cash flow payout (dividends + 150 buybacks) ratio is still far below other global markets. In 100 addition, the buyback yield in Japan remains around one- third the level in the US, at a yield of 0.93% vs. 2.8% in the 50 US in 2018. 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 • 400 Relatively few companies are currently buying back US shares: Japanese companies that buy back shares are still 350 in the minority; only ~30% companies have announced 300 Europe buybacks since 2009. Moreover, the top 20 TOPIX 500 250 companies in terms of the size of their buybacks 200 accounted for more than 70% of the total value of all 150 buybacks. 100 50 Hiromi Suzuki, Japan Equity Strategist For more, see: Japan Shareholder Review Monitor, 11 March 2019. 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: Datastream, Worldscope, Goldman Sachs Global Investment Research. Ticking up However, the focus on dividends can reduce a management Shareholder returns for TSE1 (inc. Toshiba), ¥tn, % of cash balances (rhs) team’s flexibility and lead to missed opportunities. Share 30 Dividends (lhs) 6% buybacks tend to be more flexible because they signal less of Buyback (lhs) GS Est Shareholders Return/Shhldrs' Eq (rhs) a commitment and also can be implemented over time, 25 5% hopefully taking advantage of dips in share prices to buy. No such flexibility exists with dividend pay-outs, especially given 20 4% the negativity associated with dividend cuts. 16.8 15 3% In the end, while the trend may be toward more buybacks, 14.5 relatively weak European economies suggest a large pickup is 10 2% unlikely. We expect EPS growth of just 2% in 2019 and 2020 for SXXP, which will likely limit expansion in cash distribution. 5 1% 6.8 7.8 Sharon Bell, European Equity Strategist 0 0% Email: [email protected] Goldman Sachs International FY06 07 08 09 10 11 12 13 14 15 16 17 18E 19E Tel: +44-20-7552-1341 Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 17 Top of Mind Issue 77 SummaryEl of our key forecasts Revision Notes and inflation that the in the as Euro our lack area, view of as well near-term policy ECB raise likely thesupport bar for will data toactivity keep sentiment stable. median dots from our 10-year Treasury US lowered 29, On March. yield we March forecast for year-end 2019/2020 to 2.80%, from 3.00%/2.85% on the Fed’s previously, shiftdovish and market repricing of growth our expectations. lowered 5, On we March 3m/6m forecasts EUR/USD to 1.14/1.17, from 1.17/1.20 reflecting previously, the market’s negative outlook forgrowth and inflation the in Euro area. that the as our lackarea, view of aswell near-term raise likely thesupport policy will ECB barfor data to activity keep sentiment stable. still-sluggishour growth. 3m/6m lowered forecasts 5, On we EUR/USD March to 1.14/1.17, from 1.17/1.20reflecting previously, the market’s negative outlook for growth backdrop. higher-than-expected corn stocks the and rising in US crop forecasts Brazil. in 4Q2019, reflecting a stronger-than-expected consensus for no hikes the 2019 in in Fed’s reflectingpreviously, the market’snegative outlook for growth and inflation the in Euro 0.35%/0.75%, from 0.65%/1.05% meeting March dovish the given and ECB’s previously, reflectingpreviously, the year-to-date equities Chinese in rally and an improved macro reflecting a larger-than-expected the by recent driven rally oil deficit to owing tighter and acceleratingsupplies demand. our 6m/12m lowered On 9, April we corn price forecasts to $3.60/t,from $3.75/t fundamentals, on bearish supply previously, such as On March 20, we pushed back 20,On we March our forecast for the Fed rate next hike intofrom 2020 our 3m/6m lowered forecasts 5,On we EUR/USD March to 1.14/1.17, from 1.17/1.20 forecast our 10-year yield Bund US lowered 8,On for we March year-end 2019/2020 to rolled forwardOn 2, April we and liftedour target 12-month index MXCN to 94, from 86 raisedOn our 8, April 3-month we Brent price forecast to$72.50, from $65 previously, - - - - - 0.75 0.25 2.80 2020 Cons 10-yr 12-mth - - - - GS 360 0.35 0.10 2.80 2019 - - - to 2.50 8.00 0.25 2.75 2.50 2020 -0.10 Cons Rates (% eop) (% Rates Corn (cent/bu) 3-mth Policy* - - MRO Rate to Fed Funds GS 7-Day Repo 7-Day 375 0.00 2.50 6.50 2.50 2.25 2019 -0.10 Policy DepositPolicy ------Cons Cons MXCN SP500 TOPIX 12-mth 12-mth DAX 30 - - - BOVESPA 94 GS GS 1450 1675 3025 3350 Euro Stoxx 50 Equity ------Gold ($/toz) Cons Cons 3-mth 3-mth MXCN SP500 TOPIX DAX 30 - - - - BOVESPA GS GS 1350 1650 2750 3250 Euro Stoxx 50 - - + 107 1.18 1.18 1.18 6.66 3.70 Cons Cons $/JPY $/BRL EUR/$ EUR/$ EUR/$ 12-mth 12-mth $/CNY - GS GS 105 1.20 1.20 1.20 6.60 3.60 7000 FX - - + 110 1.14 1.14 1.14 6.71 3.80 Copper ($/mt) Cons Cons 3-mth 3-mth $/JPY $/BRL EUR/$ EUR/$ EUR/$ $/CNY - GS GS 108 1.14 1.14 1.14 6.65 3.70 6400 67 1.9 3.3 1.4 1.4 0.5 6.0 2.5 Cons Cons 2020 12-mth 60 2.1 3.7 1.4 1.4 0.7 6.1 3.0 GS GS 68 2.4 3.4 1.2 0.9 0.7 6.2 2.0 Cons Cons GDP Growth yoy) (% 2019 Brent crude oil ($/bbl) 3-mth 2.5 3.4 1.0 0.7 0.5 6.3 2.0 GS GS 72.5 US CHINA JAPAN BRAZIL GLOBAL GERMANY EURO AREA Commodities CNY daily fix CNY daily Note: Recent revisions marked red; in GDP consensus is Bloomberg; other all consensus is Reuters; commodity 12-mo consensus is Reuters for 2019 average. + Source: Bloomberg, Thomson Reuters, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 18 Top of Mind Issue 77 GlossaryEl of GS proprietary indices

Current Activity Indicator (CAI) GS CAIs measure the growth signal in a broad range of weekly and monthly indicators, offering an alternative to Gross Domestic Product (GDP). GDP is an imperfect guide to current activity: In most countries, it is only available quarterly and is released with a substantial delay, and its initial estimates are often heavily revised. GDP also ignores important measures of real activity, such as employment and the purchasing managers’ indexes (PMIs). All of these problems reduce the effectiveness of GDP for investment and policy decisions. Our CAIs aim to address GDP’s shortcomings and provide a timelier read on the pace of growth. For more, see our CAI page and Global Economics Analyst: Trackin’ All Over the World – Our New Global CAI, 25 February 2017. Dynamic Equilibrium Exchange Rates (DEER) The GSDEER framework establishes an equilibrium (or “fair”) value of the real exchange rate based on relative productivity and terms-of-trade differentials. For more, see our GSDEER page, Global Economics Paper No. 227: Finding Fair Value in EM FX, 26 January 2016, and Global Markets Analyst: A Look at Valuation Across G10 FX, 29 June 2017.

Financial Conditions Index (FCI) GS FCIs gauge the “looseness” or “tightness” of financial conditions across the world’s major economies, incorporating variables that directly affect spending on domestically produced goods and services. FCIs can provide valuable information about the economic growth outlook and the direct and indirect effects of monetary policy on real economic activity. FCIs for the G10 economies are calculated as a weighted average of a policy rate, a long-term risk-free bond yield, a corporate credit spread, an equity price variable, and a trade-weighted exchange rate; the Euro area FCI also includes a sovereign credit spread. The weights mirror the effects of the financial variables on real GDP growth in our models over a one-year horizon. FCIs for emerging markets are calculated as a weighted average of a short-term interest rate, a long-term swap rate, a CDS spread, an equity price variable, a trade-weighted exchange rate, and—in economies with large foreign-currency-denominated debt stocks— a debt-weighted exchange rate index. For more, see our FCI page, Global Economics Analyst: Our New G10 Financial Conditions Indices, 20 April 2017, and Global Economics Analyst: Tracking EM Financial Conditions – Our New FCIs, 6 October 2017. Global Leading Indicator (GLI) The GS GLI was designed to provide a timelier reading on the state of the global industrial cycle than existing alternatives did, and in a way that is largely independent of market variables. The GLI has historically provided early signals on global cyclical swings that matter to a wide range of asset classes. The GLI currently includes the following components: a consumer confidence aggregate, the Japan IP inventory/sales ratio, Korean exports, the S&P GS Industrial Metals Index, US initial jobless claims, Belgian and Netherlands manufacturing surveys, the Global PMI, the GS AUD and CAD trade-weighted index aggregate, global new orders less inventories, and the Baltic Dry Index. For more, see our GLI page and Global Economics Paper No. 199: An Even More Global GLI, 29 June 2010. Goldman Sachs Analyst Index (GSAI)

The US GSAI is based on a monthly survey of GS equity analysts to obtain their assessments of business conditions in the industries they follow. The results provide timely “bottom-up” information about US economic activity to supplement and cross- check our analysis of “top-down” data. Based on analysts’ responses, we create a diffusion index for economic activity comparable to the ISM’s indexes for activity in the manufacturing and nonmanufacturing sectors. Macro-Data Assessment Platform (MAP)

GS MAP scores facilitate rapid interpretation of new data releases for economic indicators worldwide. MAP summarizes the importance of a specific data release (i.e., its historical correlation with GDP) and the degree of surprise relative to the consensus forecast. The sign on the degree of surprise characterizes underperformance with a negative number and outperformance with a positive number. Each of these two components is ranked on a scale from 0 to 5, with the MAP score being the product of the two, i.e., from -25 to +25. For example, a MAP score of +20 (5;+4) would indicate that the data has a very high correlation to GDP (5) and that it came out well above consensus expectations (+4), for a total MAP value of +20. Real-Time Indicator of Activity (RETINA) GS RETINA uses a comprehensive econometric methodology to filter incoming information from the most up-to-date high- frequency variables in order to track real GDP growth in the Euro area and the UK. For more, see European Economics Analyst: RETINA Redux, 14 July 2016 and European Economics Analyst: Introducing RETINA- UK, 2 August 2017.

Goldman Sachs Global Investment Research 19 Top of Mind Issue 77 TopEl of Mind archive: click to access

Issue 76 Issue 61 The Fed’s Dovish Pivot Fiscal Agenda in Focus March 5, 2019 October 5, 2017

Issue 75 Issue 60 Where Are We in the Market Cycle? The Rundown on Runoff February 4, 2019 September 11, 2017

Special Issue Issue 59 2018 Update, and a Peek at 2019 Regulatory Rollback December 20, 2018 July 26, 2017

Issue 74 Issue 58 What's Next for China? The Fed’s Dual Dilemma December 7, 2018 June 21, 2017

Issue 73 Issue 57 Making Sense of Midterms Geopolitical Risks October 29, 2018 May 16, 2017

Issue 72 Issue 56 Recession Risk Animal Spirits, Growth, and Markets October 16, 2018 April 17, 2017

Issue 71 Issue 55 Fiscal Folly European Elections: More Surprises Ahead? September 13, 2018 March 14, 2017

Issue 70 Issue 54 Deal or No Deal: Brexit and the Future of Europe Trade Wars August 13, 2018 February 6, 2017

Issue 69 Special Issue Emerging Markets: Invest or Avoid? 2016 Update, and a Peek at 2017 July 10, 2018 December 19, 2016

Issue 68 Issue 53 Liquidity, Volatility, Fragility The Return of Reflation June 12, 2018 December 7, 2016

Issue 67 Issue 52 Regulating Big Tech OPEC and Oil Opportunities April 26, 2018 November 22, 2016

Issue 66 Issue 51 Trade Wars 2.0 US Presidential Prospects March 28, 2018 October 18, 2016

Issue 65 Issue 50 Has a Bond Bear Market Begun? Central Bank Choices and Challenges February 28, 2018 October 6, 2016

Issue 64 Issue 49 Is Bitcoin a (Bursting) Bubble? Trade Trends February 5, 2018 September 29, 2016

Special Issue Issue 48 2017 Update, and a Peek at 2018 Breaking Down “Brexit Means Brexit” December 14, 2017 July 28, 2016

Issue 63 Issue 47 Late-Cycle for Longer? Political Uncertainty November 9, 2017 June 23, 2016

Issue 62 Issue 46 China’s Big Reshuffle Factoring in Financial Conditions October 12, 2017 May 26, 2016

Source of photos: www.istockphoto.com, www.shutterstock.com, US Department of State/Wikimedia Commons/Public Domain.

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Disclosure Appendix

Reg AC We, Allison Nathan, David Groman, Sharon Bell, Cole Hunter, David Kostin, Arjun Menon, and Hiromi Suzuki, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm's business or client relationships. Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division. Equity basket disclosure The ability to trade the basket(s) discussed in this research will depend upon market conditions, including liquidity and borrow constraints at the time of trade.

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